1. In the year 940 Nathmal Hazarimal, Ramprasad Benilal, Rameshwar Mahadeo and the Petitioner formed a partnership and commenced carrying on business in the firm name and style of Motilal Somani & Co. In or about 1946 one of the partners, Ramprasad Benilal, died and thereupon a fresh partnership was formed in the year 1947 with the three surviving partners and a new partner by the name of Puranmal Pannalal. In 1948 this partnership was also dissolved and fresh partnership was formed with the said Puranmal Pannalal and the Petitioner only as the partners although the same business, it would seem, was continued and the same name, viz., Motilal Somani & Co., was also continued. The partnership was dissolved in 1955. Upon the said dissolution the Petitioner carried on the said business in the name of Motilal Somani & Co., as the sole proprietor thereof. It is not in dispute that in spite of the changes made in the constitution of the firm of Motilal Somani & Co. the same business was carried on all throughout. Even when the Petitioner carried on business in the name of Motilal Somani & Co. as the sole proprietor thereof, the business so carried on by his was the same business as was carried on by the partnership of M/s. Motilal Somani & Co. since 1940.
2. On the 15th of December, 1955, the Petitioner informed the Income-tax Department that the firm of M/s. Motilal Somani & Co. was dissolved as from 14th November, 1955, and that on and after the 15th of November, 1955, the business carried on by that firm prior to its dissolution had become the sole proprietary concern of the Petitioner. It may also be observed that the business carried on by the Petitioner on and after the 15th of November, 1955, was continued by him in the same premises where the firm of M/s. Motilal Somani & Co. prior to its dissolution was carrying on the said business.
3. On the 25th of March, 1958, the first respondent took out a notice under section 34(1) against M/s. Motilal Somani & Co. on the ground that he had reason to believe that due to the omission or failure on the part of M/s. Motilal Somani & Co. to make a return or to disclose fully and truly all material facts necessary for the assessment for the year 1949-50, certain income chargeable to income-tax had escaped assessment for the year. The documents annexed as exhibit G to the petition and the affidavits made by the first respondent and the Thade show that on the 26th, 27th and 28th of March, 1958, attempts were made to serve the notice under section 34 on M/s. Motilal Somani & Co. and the partners thereof. These affidavits disclose that although an employee of the Income-tax Department went to serve this notice, no one representing M/s. Motilal Somani & Co. could be contacted, and in spite of his attempts to obtain the addresses of the partners of M/s. Motilal Somani & Co., he could not obtain any information about such addresses. These affidavits also disclose that although the Petitioner was at the time carrying on business in these very premises in the name and style of M/s. Motilal Somani & Co., he also could not be contacted. The result, therefore, was that the only alternative left to the Income-tax Department was to affix the notice under section 34 on the premises which was the last known address of M/s. Motilal Somani & Co. and where the Petitioner at the time was also carrying on his business. The notice under section 34 also contained the notice under section 22(2). Since however no return was filed as directed under the notice, a notice under section 22(4) addressed to M/s. Motilal Somani & Co. and also the four partners, who were the partners in that firm in 1947, was also served. This notice was served personally upon three out of the four partners including the petitioner.
4. The petitioner has filed this present petition to have the notices under section 34 and section 22(4) of the Income-tax Act set aside.
5. Mr. Palkhivala for the Petitioner has raised two questions : (I) that the notice under section 34 addressed in the name of M/s. Motilal Somani & Co. is bad in law, and (2) that the service of the said notice by affixing it on the premises which, as I have said, were the premises where the firm had carried on its business and which address was its last known address to the Income-tax Department, was also bad.
6. It is contended by Mr. Palkhivala that the firm of Mr. Motilal Somani & Co. having been dissolved, (of which fact notice was given to the Income-tax Department by the Petitioner's letter dated 15th December, 1955) the notice under section 34 ought to have been addressed in the names of the partners who were partners at the time relevant to the assessment year 1949-50 and that the notice cannot be addressed in the name of the dissolved firm, the dissolved firm, according to him, not being liable to assessment. In other words, the contention of Mr. Palkhivala was that the dissolved firm cannot be said to be the assessee within the meaning of section 34 and, therefore, the notice having been addressed in the name of the dissolved firm, was invalid. Mr. Palkhivala argued that in the case of a firm, which no longer exists at the time when assessment is sought to be made, an assessment can be made either under section 26 or under section 44. Mr. Palkhivala urged that in this case, however, section 26 cannot be made applicable as the business of the firm of M/s. Motilal Somani & Co. was discontinued upon its dissolution and, therefore, it would be only section 44 that would be applicable.
7. Section 26 of the Act provides that where, at the time of making as assessment under section 23, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment. It is clear, therefore, that where a mere change has taken place in the constitution of a firm or where a firm has been newly constituted, the liability to assessment would be that of the firm as constituted at the time of making the assessment. Sub-section (2) of section 26, on the other hand, provides that were a person carrying on any business 'has been succeeded in such capacity by another person, such person and such other person shall...each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year'. Sub-section (2) of section 26 thus deals with cases where at the time of making the assessment it is found that there has been a succession in which event the persons liable to assessment, subject to the provisions of sub-section (4) of section 25, are the person who was carrying on the business prior to the succession and the person who succeeds to that business, each to be assessed in respect of the actual share of the income, profits and gains of the previous year derived by him. Sub-section (I) of section 26 thus deals with either a mere change in the constitution of the firm or where the firm has been newly constituted; sub-section (2) on the other hands deals with a case where a partnership is dissolved and one partner takes over and continues the partnership business. That would be a case of succession and, therefore, would be covered by sub-section (2) of section 26 (see Kanga and Palkhivala, Income-tax, 4th Ed. Vol. I, 643).
8. The facts set out in paragraph I of the petition make it clear that in 1948 a fresh partnership as formed in the name and style of Motilal Somani & Co. after the earlier partnership had been dissolved and that two partners, viz., Puranmal Pannalal and the Petitioner, were the partners in this new firm. This new firm was in its turn dissolved in 1955 and at the date where the notices under section 34 and section 22(4) were served, the Petitioner was carrying on the business of the old firm in the same name of M/s. Motilal Somani & Co. and in the same premises where the partnership of M/s. Motilal Somani & Co. had carried on its business. Where the partnership of M/s. Motilal Somani & Co. had carried on its business. It is clear therefore that on the facts expressly stated by the Petitioner himself in the petition this would be a case of succession within the meaning of section 26(2).
9. It must however be remembered that this is not a case of ordinary assessment under sections 22 and 23 but a case where a notice has been served under section 34 for reopening the original assessment on the ground that there has been an escapement of certain income, profits or gains from assessment for the assessment year 1949-50. It would therefore be a relevant consideration to find out who was the person liable to be assessed under section 34 in respect of the escaped income. In other words who would be the assessee for the purpose of section 34 to whom a notice has to be served under the section in order that the Income-tax Officer would have the jurisdiction under that section to re-asses The relevant part of section 34(I) is as follows :
'If the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed... he may in cases falling under clause (a).... serve on the assessee... a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or re-assess such income, profits or gains' etc.
10. The question, therefore, is who was the assessee for the purpose of section 34 on the 28th March, 1958, when the notice addressed in the name of M/s. Motilal Somani & Co. was served by affixing the same on the premises where the Petitioner was then carrying on the said business and which was the last known address of the firm of M/s. Motilal Somani & Co. It will be observed that section 34 states that the assessee is the person by whose failure or omission to make a return or to disclose fully and truly all the material facts necessary for his assessment there has been as escapement. The important words in section 34, which would seem to throw light upon the contention raised by Mr. Palkhivala, are the words 'assessee' and 'escaped assessment for that year'. In other words, the income that has escaped assessment by reason of the omission or failure on the part of the assessee is the income which would have been chargeable during the assessment year, in this case the assessment year 1949-50. In order therefore to find out who is the assessee within the meaning of section 34 and to whom a notice under section 34 has to be addressed, the words 'escaped assessment for that year' are relevant words, for they show that the income that escaped assessment for that year, viz., for the assessment year 1949-50, was the income of the firm M/s. Motilal Somani & Co. It must therefore follow that the assessee for the purpose of section 34 was the firm of M/s. Motilal Somani & Co. owing to whose omission or failure certain income, profits or gains which were chargeable during the assessment year 1949-50 had escaped assessment. Prima facie therefore the notice under section 34 has to be addressed to that assessee owing to whose failure or omission his income for that year has escaped.
11. Mr. Palkhivala, however, strenuously argued that it would be section 44 which would be applicable in this case and contended that since the firm of M/s. Motilal Somani & Co. has been dissolver, it would be the partners of that firm at the date of its dissolution who would be liable to assessment as also for the amount of tax payable. Therefore the notice under section 34 had to be addressed in the names of those partners and not in the name of the firm. Section 44 provides that where any business carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved, 'every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall, in respect of the income, profits and gains of the firm or association, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment.' It is clear from the terms of section 44 that that section contemplates discontinuance of business which was till then carried on by a firm and provides that in that case it would be the persons who were the partners in the firm at the date of such discontinuance who would be liable jointly and severally for the assessment and for the amount of tax payable. Now, if Mr. Palkhivala were to be correct, and if section 44 were to apply, obviously the notice under section 34 to a dissolved firm would be to a wrong party, the partners of the firm being liable to assessment, and as observed in Commissioner of Income-tax v. Ramsukh Motilal, the notice would be invalid and the Income-tax Officer would have no jurisdiction to proceed with the assessment, the invalidity of the notice affecting his very jurisdiction.
12. In support of his contention Mr. Palkhivala relied upon the decision of the High Court of Calcutta in Bose v. Manindra Lal Goswami. In that case A, B, and C were partners of an unregistered firm, which did business from 1st April, 1940, up to 31st March, 1944. The Income-tax Officer being of opinion that the firm's income for the assessment year 1943-44 had escaped assessment issued a notice to A under section 34 of the Indian Income-tax Act wherein A was described as 'A, partner of Dyes and Chemical Agency', the income which had been discovered to have escaped assessment was described as 'your income' and he was required to submit a return of 'your total income and total world income' assessable for the year ending 31st March, 1944. A similar notice was a addressed to B but no notice was issued to C. B submitted a return disclosing a loss which was not accepted and the Income-tax Officer determined the total income of the firm and made an assessment of the firm and on the basis of that assessment proceedings for recovery of tax were initiated. It was held that the notice under section 34 as issued on A and B having been addressed to them as partners could not form the basis of valid assessment of the firm or the firm's income and A and B could not be proceeded against for recovery of the tax due under that assessment. On a contention raised on the basis of section 44 of the Act, it was held that assuming that section 44 were to apply, after the dissolution of a firm, an assessment of income-tax of its pre-dissolution income can only be made on the persons who were the partners of the firm at the time of the dissolution and cannot be made on the. It was observed that the fact of the discontinuance of the business of a firm cannot always mean the dissolution of the firm. The Legislature in fact has advisely omitted in section 44, when dealing with the business of a firm, the dissolution of such a firm and has used the word 'discontinued' so far as its business is concerned. But the decision in Bose v. Manindra Lal would be an authority only for the proposition that where discontinuance of a business of a firm is established or is a fact over which there is no dispute, then by reason of section 44 the liability to assessment would be that of the partners and not of the firm. The question, therefore, is one of fact whether on the date of the notice dated 25th March, 1958, (1) who was the assessee within the meaning of section 34(1), and (1) who was the assessee within the meaning of section 34(1), and (2) for purpose of deciding who was the assessee, that is to say, the person liable to assessment, whether there was a discontinuance of business so as to attract the provisions of section 44 as contended for by Mr. Palkhivala.
13. Taking the second question first, the facts are, as I have already pointed out, that after the partnership consisting of Puranmal Pannalal and the Petitioner was dissolved in 1955, the Petitioner carried on the same business in the name of Motilal Somani & Co. as the sole proprietor thereof. It is true that in December, 1955, the Petitioner gave notice of dissolution of the firm of Motilal Somani & Co. and of his having taken over the business of that firm as the sole proprietor thereof. But that does not mean that the business of M/s. Motilal Somani & Co., which was till 1955 carried on by that firm, was discontinued as would be the case under section 44 and as was in fact the case in the Calcutta decision. In other words, it is only when there is a discontinuance of the business that section 44 would come into operation. As I have already observed, on the facts, as set out in paragraph 1 of the petition, there is no such case of discontinuance of the business of the firm which was started in 1940 and, therefore, section 44 cannot be said to be applicable to the facts of this case. In these circumstances, it would be sub-section (2) of section 26 which would apply, apart from the consideration to which I have already made a reference while dealing with section 34 that the assessee contemplated under section 34 is the assessee whose income by reason of his failure omission has escaped assessment of a particular year, in this case the assessment year 1949-50. Since the petitioner on his own showing took over the business on and after the 15th of November, 1955, which business was carried on by M/s. Motilal Somani & Co. since 1940, in spite of several changes having taken place in the constitution of that firm from time to time, the business which was carried on since 1940 was the business which ultimately on 15th November, 1955, the Petitioner took over. In my view, therefore, there was a succession to that business within the meaning of sub-section (2) of section 26 and, therefore, the assessee at the material time would be that assessee as contemplated in sub-section (2) of section 26. Under sub-section (2) of section 26 of the persons who would be liable to be assessed would be the person carrying on the business and the persons who successes to that business and each of them would be liable in respect of the actual share of the income, profits and gains of the previous year come to him. Where the case falls under section 34, no question however of the income, profits and gains of the previous year arises, for under section 34 what is sought to be done is to reopen the assessment which has already taken place and for the year during which it is alleged there has been an escapement of income-tax by reason of the failure or commission on the part of the assessee, viz., the assessee of that particular year.
14. The petitioner, as I have pointed out, continued to be a partner until the 14th November, 1955, and, as stated by him in the petition, the same business was taken over by him and continued by him in the name of Motilal Somani & Co. He being the sole proprietor of M/s. Motilal Somani & Co. on and after the 15th November, 1955, a notice addressed in the name of Motilal Somani & Co. of which he was at the date of service the sole proprietor, even if section 44 were to be applicable, would be a notice upon him as a partner of the dissolved firm and, therefore, it would be a valid notice so far as he is concerned, as under section 44, as urged by Mr. Palkhivala himself, he would be liable jointly and severally for the assessment on the income of the firm whose business has been discontinued. Therefore, the contentions raised by Mr. Palkhivala on the validity of the notice under section 34 cannot be accepted. The notice under section 34(1) both on the consideration of section 34 as also under section 26(2) were valid notices and the Income-tax Officer became entitled to proceed with the assessment on the basis of that notice.
15. The next contention urged by Mr. Palkhivala was with regard to the invalidity of the service of the two notices in question. His contention was that there was no reason for the Income-tax Officer to have served the notices in question by affixing them on the premises of M/s. Motilal Somani & Co. He further contended that even assuming that there was justification for such a substituted service, that service had not been effected in accordance with the provisions of section 63 of the Income-tax Act. Section 63 provides that a notice or a requisition under the Act may be served on the person therein name either by post or as if it were a summons issued by a court under the Code of Civil Procedure. When a notice is served other than by post, for instance, through a peon or a process-server, it need not be served personally on the assessee; it may be served on his accredited agent. Therefore the service at the assessee's business premises on an agent exercising authority in respect of income-tax matters, though not authorised in writing in that behalf, is a valid service under section 63. In this case the notices were sought to be served through an employee of the Income-tax Department upon the assessee personally. As I have pointed from the affidavits on record, several attempts were made to serve the partners of M/s. Motilal Somani & Co. but the person who went with the notices was thwarted from serving them by being told that the firm had been dissolved, that the partners seldom attended the premises and though enquiries were made by him the residential addresses of the partners were not given to him on one excuse or the other. On these facts it is clear that it was impossible to serve the notices personally upon the partners or any of them including even the petitioner though he was carrying on business at these premises. These facts have been clearly stated in the affidavits of the first respondent and of Thade. At one stage Mr. Palkhivala sought to argue that there had in fact been no service at all. It was also sought to deny that the two notices in question were affixed on the premises. But when Mr. Palkhivala found that the affidavits in reply clearly averred that the notices had been affixed on the premises, he gave up that denial but sought to argue that even if they were so served, the service was not in accordance with the provisions of the Code of Civil Procedure. That contention, in my view, has no justification. The service, on the facts as are disclosed from the affidavits, was in fact in accordance with the terms of Order V, rule 17, of the Code of Civil Procedure which provides that where the serving officer, after using all due and reasonable diligence, cannot find the defendant and there is no agent empowered to accept service on his behalf, nor any other person on whom service can be made, the serving officer shall affix a copy of the summons on the outer door or some other conspicuous part of the house in which the defendant ordinarily resides or carries on business and shall then return the original to the court from which it was issued with a report endorsed thereupon or annexed there to stating that he has so affixed the copy, the circumstances under which he did so and the name and address of the person, if any, by whom the house was identified and in whose presence the copy was affixed. Thade, who served the two notices in question, has in his affidavit stated that he took all due and reasonable diligence and care to find out the residential addresses of the partners of Motilal Somani & Co., that he was prevented from getting these addresses and than in those circumstances the only way in which he could serve the notices was by affixing it on the premises which was the last known address of the firm and where the petitioner at any rate has been carrying on his business. In these circumstances it is not possible to accept Mr. Palkhivala's contention that the service was invalid in any way so as to affect in any event the jurisdiction of the first respondent to proceed with the assessment under section 34 of the Act. These were the only connotations raised by Mr. Palkhivala on behalf of the petitioner. In my view none of them can be accepted.
16. The petition must therefore fail. The rule is discharged. The Petitioner will pay to the respondents the costs of this petition.
17. Petition dismissed.